IAS 10 Events after the Reporting Period Problematized – Some Questions Regarding the Standard’s (Read by its Letter) Understandability

5.1 Do we really need the IAS 10?

Before going deeper into the actual standard, it is a natural starting point to ask whether this standard really has any significant legal, or other, importance, and, in that case, what kind of importance that would be. Looking at all the rules within it, it clearly appears to be important – and these questions indeed are. Events after the reporting period may be of importance, not only to the management’s own decision making regarding how a particular way to report for the previous financial year is the right one, but also as evidence, for example, vis-à-vis the auditor (or in a tax process), that the (used or proposed) accounting method is actually correct. Needless to say, they are also highly important from an investor perspective. The point is rather that had it not been for the IAS 10 (or similar rules in other systems of accounting rules) it seems very plausible, that it would anyway be not only correct, but indeed also necessary, to have events after the reporting period that provide information and the situation at the balance day give cause to adjustment.24

Be that as it may, it is hard to clarify what the law would say without some of the rules it actually has. Let us assume, however, that this is a correct assumption, in the sense that, more or less, all that is said in the IAS 10 would be the correct way to handle events after the reporting period, even without the actual standard. Is it perhaps, in fact, possible in this context that the rules regarding events after the reporting date are actually most likely to confuse? When rules exist, which do not add much, or anything, that is not already the case, there is a risk that the interpreter will read the rule so that it adds something of actual importance. This could mean that either the basic legal situation (without the “unnecessary rule”) or that the special (“unnecessary”) rule regarding events after the reporting period are misunderstood.25

However, rules that say something that would apply even without the actual rules are probably not very uncommon. Nor must they be seen as problematic, or only problematic, even if they are associated with certain risks. Firstly, these rules may clarify that the management cannot ignore information that appears after the balance sheet date. They are pedagogical in the sense that they give information regarding how to handle events after the reporting period. Secondly, they may clarify how long the company needs to keep the report open for additional information about the conditions at the balance sheet date. Both functions are relevant, although the same would probably be the case without the rules.

A third function of the IAS 10 is that the rules require that the management should report significant events in notes or management reports, even if they do not highlight the situation at the balance sheet date. It may be unclear whether, or to what extent, such a requirement can be read from general, underlying accounting principles.26

The question “Do we really need the IAS 10?” could also be rephrased, as a question regarding if enough, more precise or more perfectly to each subject adopted and functionally integrated rules and guidance is, could or should be given in other standards (only). It might be argued that, for example, the rules regulating the valuation of receivables in IFRS 9, inventories in IAS 2 or calculation of impairment losses in IAS 36 are enough and that there is no real need for a general IAS 10. From a legal point of view, it is hard to say which policy is best – only a general IAS 10, specialized rules for each field or, as today, a hybrid solution. A general solution, like the IAS 10, can have its benefits when it comes to accounting issues not dealt with in standards, but perhaps such a general solution should best be integrated in the Conceptual Framework for Financial Reporting. It seems paramount finding out which solutions appear to be most feasible from a practical point of view, but that goes beyond the purpose of this paper.

The analysis above (5.1) might seem more appropriate as an ending of this kind of article, instead of being placed quite early, and indeed it might have been used as such. However, It could be argued that the above findings, and the possibility to manage fairly well without the rules on events after the reporting period, to be of relevance also for the understanding and evaluation of these rules on a more detailed level. Henced it is placed here.

5.2 What is an “event”?

The term “event” is central in the standard. The meaning of the term is a key issue, since, according to the rules, certain events are to be considered. Therefore, its meaning has to be easily understood, at least on a principal level. However, it is here argued that the term, as used in the IAS 10, is ambiguous, and that a different, or fine-tuned, terminology ought to be considered.

IAS 10 (paragraph 9) provides the following examples of events after the reporting period that require adjustments (so-called adjusting events):

1. the settlement after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period. The entity adjusts any previously recognised provision related to this court case in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or recognises a new provision. The entity does not merely disclose a contingent liability because the settlement provides additional evidence that would be considered in accordance with paragraph 16 of IAS 37.

2. the receipt of information after the reporting period indicating that an asset was impaired at the end of the reporting period, or that the amount of a previously recognised impairment loss for that asset needs to be adjusted. For example:

   1. the bankruptcy of a customer that occurs after the reporting period date usually confirms that a loss existed at the end of the reporting period on a trade receivable and that the entity needs to adjust the carrying amount of the trade receivable; and

   2. the sale of inventories after the reporting period may give evidence about their net realisable value at the end of the reporting period.

3. the determination after the reporting period of the cost of assets purchased, or the proceeds from assets sold, before the end of the reporting period.

4. the determination after the reporting period of the amount of profit-sharing or bonus payments, if the entity had a present legal or constructive obligation at the end of the reporting period to make such payments as a result of events before that date (see IAS 19 Employee Benefits).

5. the discovery of fraud or errors that show that the financial statements are incorrect.

The term is here ambiguous, mainly because “event” can relate both to (a) some form of underlying event (say a court order or a debtor’s bankruptcy) and (b) the management’s coming to awareness of such events and or other conditions. The underlying events (a) might certainly, in the eyes of many readers, be thought of as “events”. Which of these two (a or b) is actually the event, or are they both to be considered events? The standards terminology is not fully clear in this respect and it could be argued that this is not the kind of unclarity that in a positive way gives room for judgements and estimations, but rather one that confuses.

In most cases, the IAS 10 gives guidance on how events after the reporting period are to affect the reporting, which presupposes that they are known. Let us, for example, assume a company is (i) unable to pay its debt in December 20X1, (ii) files for bankruptcy in January 20X2 and (iii) the creditor observes the bankruptcy filing in February 20X2 (before the financial statements are approved by the board). In practice and in this context, the “event” is probably normally thought of as (iii) the discovery. Normally, thus, the IAS 10 seems to be aiming at events discovered by the management. This understanding of the “event” may, however, make it hard to find the best way to express the management’s obligation to actively look for relevant events after the reporting period (see 5.6) – and to clearly separate between these two aspects of the term event. Perhaps it may even give some readers the impression that all the IAS 10 requires is that events that are known are handled according to the standard – not that the management has to look actively for them.

Using the term events after the reporting period as aiming at discoveries, rather than at the underlying situation or underlying events, logically makes the discovery after the balance sheet date of an underlying event that occurred before the balance sheet day an event after the reporting period. This is, in my view, a perfectly correct accounting principle, but the terminology might seem confusing. It seems counterintuitive to call such discoveries events after the reporting period, since only the discovery of them takes place after the balance sheet date. That is especially the case if it is a discovery after the balance sheet date that actually confirms what the management had already assumed or if they had no preliminary view on the matter – in such cases, no “adjustments” are made (see 5.3).

The term event after the reporting period is thus unclear, seen isolated. This ambiguity may not play a crucial role, but after all, these are obligating regulations, requiring actions from of the management. Hence, it would be better if the rules were more clearly worded. The regulation should probably have been written with a clearer and separate focus on two different aspects of events after the reporting period:

First of all, and primary, it is of relevance to take aim at what has come to the management’s attention after the reporting period (before the period of the events after the reporting period expires). It may, in line with the above, be argued that the “age” of the underlying situation/event/events (if it/they existed on the balance sheet day or not, which rotting of a building must, but a customer’s bankruptcy must not) is of limited importance. What counts in that perspective is only what has come to the management’s attention – and how such (new information-)events are to be considered in the accounting.

Secondly, it is of relevance to, in some shape or form, address the need for the management to look for (information on) such underlying situations and events – and to sometimes let what has actually come to the management’s attention after the balance sheet day give cause to look for even more information regarding the situation at the balance sheet day.

5.3 Confirm, provide evidence, indicative of ...

IAS 10 describes adjusting events as events that “confirm” (paragraph 9) or “provide evidence of” (Paragraph 3a) conditions that existed earlier. Here too, the wording of IAS 10 could lead the reader wrong. From a general linguistic perspective, “confirm” means that something makes certain or proves true. Synonyms of confirm are, for example, proving and expecting.27 In my view, “provide evidence” leads the readers in, basically, the same direction; there is something expected or believed, that is to be proved by evidence.

However, what can be confirmed is actually only the assessments, feelings, premonitions and fears, etc. of a human being. Situations, as such, are not able to predict or value, nor take in a confirmation, so it cannot be the situation itself that something is supposed to be confirmed to – but to one person or more.28 Nor does it seem to be normal use of language to say that an event itself can confirm something – confirmation can reasonably, in this context, only come from a person who makes the interpretation that an event after the reporting period contributes in a relevant way to giving a picture, possibly confirmation, of the situation on the balance sheet date. What can be confirmed in these particular contexts is that the management’s ideas regarding some kind of state of affairs, presumably in the form of that the management itself ascertains that they consider something they adopted on the balance sheet date, are subsequently confirmed by new information. One example is that the management believes that a development project that the company is working on will fulfil the requirements to trigger capitalization of the company’s expenses for the project. This assumption can, later on, be confirmed by events after the reporting period. This (above) interpretation indicates that we have before us a subjective requisite (see definition in Chapter 5.7.) relating to knowledge and expectations of the management – ideas that are to be confirmed or evidence to be found. The expression “provide evidence” may, however, not speak in exactly the same direction as “confirming”, which in itself is slightly confusing. However, the general meaning of the wording of both these expressions is that the rules take aim at something that confirms some kind of belief of the management.

This problematic use of words gets relevant when an event after the reporting period does not lead to a confirmation of the management’s premonitions. Perhaps the best example of such a situation is when an event after the reporting period gives the management a falsifying answer compared to their premonitions, for example, an unexpected fraud. Such an event does not constitute confirmatory information for the management. The same could be said of events indicating that something the management had believed or hoped for was not correct or showing something with a higher degree of precision, without the management previously having a more precise preliminary opinion on the matter. In none of these cases does it seem perfectly correct to speak of “confirmation”. Does this mean that such events after the reporting period that do not confirm beliefs of the management should not give rise to corrections of the accounts, in the same way as events after the reporting period confirming something are supposed to? The non-confirmatory events do not meet, at least not in linguistic terms, the necessary condition of the central rule, because they are not confirming. No, clearly this would not be a reasonable interpretation:

1. Not to take into account such (to the management) surprising events after the reporting period would be completely contrary to the purpose of IAS 10, as highly important information about the situation at the balance sheet date would be of no relevance to the reporting – just because it did not show that something (one, many or every member of) the corporate management thought, later turned out to be correct and is therefore not “confirming”.

2. Such a method would also give various results to the accounts, depending on whether management was optimistic or pessimistic at the balance sheet date, which should reasonably be irrelevant in this context. It would also be a difficult question who (primarily within the corporate management) would have to have expected something in such a sense that an event after the balance sheet date would confirm something in a manner relevant to the report.

3. Such an interpretation conflicts with some of the examples given in the commentary to the relevant paragraph. Specifically, the last example, about discovery after the balance sheet date of fraud or errors that causes the financial report to be incorrect, clearly shows that the IAS 10 has been thought to include surprising events after the balance sheet date.

4. Furthermore, as discussed above (5.1), general accounting principles would probably have these events after the balance sheet date considered, irrespective of explicit accounting rules regarding them. It is as shown above, in the nature of the accounting work that events after the balance sheet date, which show the situation at the balance sheet date, are taken into consideration – and even the non-confirmatory events would thus be relevant to the final formulation of the accounts. It would be very strange if the rules on events after the reporting period counteracted such a natural part of general accounting principles.

5. Finally, a subjective requisite would be difficult to handle in practice and open up to objections about ignorance. This could give rise to evidence problems and opportunities for management to manipulate the reporting in an undesirable manner.

The key issue here, rather, is if there is relevant information regarding the situation on the balance sheet date. Whether this confirms someone’s beliefs must be beside the point. For these reasons, “confirm” and “provide evidence of” seems to be to interpret as essentially different from what constitutes normal language use.

What would have been a better way to express what, arguably, is meant? Perhaps the IAS 10 should rather simply have focused on information showing the state of affairs on the balance sheet date – regardless of whether this information confirmed (the management’s preliminary assessments was actually correct) or falsified (the management’s preliminary assessments was actually not correct) previous beliefs or provided first-time information (for example, a stock check carried out in January).

Another aspect on the wordings evidence and confirm is that it can be argued that something that “confirms” is to be seen as certain enough to be decisive (for the accounting question) but that “evidence” merely speaks for a certain accounting solution (but is not necessarily in itself strong enough to be crucial). It does not seem self-evident that the different situations in the IAS 10 where these respective expressions are used are in such a way different from each other that this difference is to be looked upon as intended or rational. There is a difference in the requirements for evidence between evidence and confirm, and from the wording of the standard, it is not obvious what is meant. If we add to this analysis the words used in 3b), namely, events that are indicative of conditions arisen after the statement of financial position date, things do not get clearer. Evidence and indicative imply different requirements for evidence, if this is the right interpretation. Is this difference actually intended, and why? Should not the requirement for evidence be neutral, so that the most probable interpretation of the state of affairs at the balance day is chosen as decisive for the report, or is there some higher reason for this possible difference?

5.4 At the balance sheet date or later?

The central question regarding events after the reporting period is which events should be regarded providing evidence of something that was the case on the balance sheet date (adjusting events) respectively that are indicative of conditions arisen after the reporting period (non-adjusting events). However, this interpretation seems hard to give much substance apart from the individual case, where, among other things, the actual circumstances and certainties or uncertainties are known. The examples provided in the doctrines regarding events after the reporting period, and in the actual standard, are written in the light of great knowledge and experience, and they show a high level of similarity.29 This indicates that the discussion has reached the level of maturity where there is little more to say on the general level. That does not, however, mean that it is easy, in accounting practice, and for each event, to decide whether an event is to be seen as adjusting or not. In the light of this being the situation, here only provide some general reflections will be provided.

As previously mentioned, the IAS 10 (Paragraph 9) provides examples of adjusting events after the reporting period, for example the settlement after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period or the discovery of fraud or errors that show that the financial statements are incorrect. There are also examples of non-adjusting events (Paragraph 11), for example, a decline in market value of investments after the end of the reporting period. According to the IAS 10, the decline in market value does not normally relate to the condition of the investments at the date of the reporting period but reflects circumstances that have arisen subsequently. Therefore, an entity does not adjust the amounts recognized in its financial statements for the investments. Similarly, the entity does not update the amounts disclosed for the investments as at the end of the reporting period, although it may need to give additional disclosure under Paragraph 21.

As Picker et al. points out, it is not altogether easy to tell why, according to Paragraph 11, a decline in the market value of investments between the end of the reporting period and the date when the financial statements are authorized for issue are considered not normally relating to the condition of the investments at the date of the reporting period, whereas, according to 9b (i), the bankruptcy of a customer that occurs after the reporting period date is regarded to usually confirm that a loss existed at the end of the reporting period on a trade receivable, and in 9b (ii) the sale of inventories after the reporting period may give evidence about their net realizable value at the end of the reporting period.30 The different solutions in these examples constitutes a good example of how hard it can be, drawing the line between what should be looked at as adjusting and non-adjusting events, respectively. Although more guidance is often welcome, I find no cause to criticize the IAS 10 in this area – the basic principle is, and must be, fairly easy to express, but the actual application in the individual case is in some cases inevitably hard.

Some non-adjusting events after the reporting period are considered so material for economic decisions based on the financial statements that (according to Paragraph 21) an entity shall disclose them. Paragraph 22 gives a number of examples of such events, for example regarding plans to discontinue an operation. These rules, and these events, do not only oblige the entity to makes certain disclosures; they also help us understand which kind of events are considered as adjusting or non-adjusting. It might also be argued that some of these examples can provide information on what should actually be considered to, but in a limited sense, affect last year’s accounting – namely, to the extent that they provide information about the situation on the balance sheet date. This may seem counterintuitive, but please follow me through two examples. First, let us say a company sells some unlisted shares after the reporting period. This is clearly a non-adjusting event, in itself. However, the profit or loss by the sale (granted that it was at market price) could very well in some cases be considered to pertain relevant information of the value of the unlisted shares on the date of the reporting period.31 A second example is that if an expropriation of the company’s assets completes after the closing date it could, in some cases, be considered to confirm concerns the management had at the balance sheet date that an expropriation would take place. Hence, some non-adjusting events after the reporting period should probably be taken into account, in this limited sense, even apart from the demands in Paragraphs 21–22.

It is clearly not always easy to draw the line between adjusting and non-adjusting events. An example of a situation that could be difficult is if a debtor is neglecting payments during the period of events after the reporting period and it must, therefore be determined whether the debtor’s difficulties, already on the balance sheet day, were so significant that the value of the claim should be adjusted for the previous year, or if the economic difficulties have arisen after the balance sheet date. KPMG’s Practical Guide To International Financial Reporting Standards refers to this process as “identifying the key event”, which seems to be an appropriate terminology.32 Anyway, this is a derivation that can be difficult to determine, both to gain access to relevant information on the matter (it is, after all, non-official information regarding another company) and in itself – if already at the balance sheet date, prevailing conditions shall be deemed to have been sufficiently unfavorable to justify a write-down of receivables on account of events after the balance sheet date.33

The conclusion seems to be that the principles for separating adjusting events from non-adjusting, are, in themselves, relatively clear, but that this demarcation can be difficult at many times in the actual application. This dilemma has in fact a philosophical aspect, since the question of what constitutes an actual condition (albeit unknown to the management at the balance sheet date) and what is merely more or less clear prerequisites of a condition that will occur in the near future, in many cases, falls back on the view of, and the knowledge of, the very relationship between cause and effect.

In the light of these difficulties, transparency in accounting regarding which assumptions are made and which facts are used could be necessary (or highly helpful), at least in hard cases in questions of great economic importance.

5.5 To “adjust the amounts” and “recognize items/.../not previously recognized”

Events that occur after the decisive moment (but before the date when the financial statements are authorized for issue) that provide evidence of conditions that existed at the statement of financial position date (adjusting events) shall be taken into consideration by adjusting the amounts, or by recognizing items not previously recognized (IAS 10, 10.9). Accordingly, events after the reporting period may cause changes in the accounting, compared to what the management had reason to assume at the balance sheet date. The term “adjust the amounts recognized in its financial statements, or to recognize items that were not previously recognized” is however problematic and could lead to misunderstandings.

The first problem regards the fact that events that occur after the decisive moment that provide evidence of conditions that existed at the statement of financial position date mostly do not give any cause whatsoever to adjustments or to recognizing items not previously recognized – simply because they “confirm” what would have been assumed, had the accounting been finalized at the balance sheet day. Yet, according to the wording of Paragraph 9, they are to be taken into consideration by adjusting the amounts, or by recognizing items not previously recognized. This appears to be wrong, though, because that would mean adjusting something that is already correct, thus probably – or at least plausibly – making it incorrect. This interpretation is reasonably not intended, but in my view it follows by the wording of the standard (which in that case should not be followed). In any event, the wording is confusing in this respect and could have been chosen better.

The second problem regards the “or to recognize items that were not previously recognized”-part. The problem here is that events after the balance day may give cause not only to report previously not recognized items, but also to remove (previously recognized) items, for example an asset or a debt. Reasonably, the standard should be interpreted as to include also such effects, but this interpretation does not follow from the wording, it may be argued. It is hard to find a good reason to treat removal of items differently than additions – basically, the same reasons apply to both. Although the terminology should be seen as exemplifying, the standard could be clearer on this point.34

The third problem is that the term “adjust the amounts recognized in its financial statements, or to recognize items that were not previously recognized” gives the impression that there should exist a preliminary accounting or judgement to adjust. That is far from always the case. Such a preliminary accounting can, but does not need to, exist. This makes the wording of the standard confusing. The correct interpretation of this regulation appears, however, to be that relevant information from the post-reporting period should be taken into account when preparing the accounts – regardless of what, if anything, was assumed before the event after reporting period came to the attention of the management. That implies that the “preliminary accounting or judgment” perhaps should be understood as some kind of hypothetical estimate, that might have been done, and if so, would be based on the information available at the balance sheet date. The current wording does not help the reader of the standard.

A both simpler and clearer way to express the intent of the standard would be to simply state that the report should be based on relevant information regarding the situation at the balance day from within the period for events after the reporting period, and perhaps give one or two examples of what kind of adjustments that could be required.

5.6 “Consider” vs. “seek, find and consider” – How extensive is the requirement to gather information?

Sometimes, events after the closing day provide information on the situation at the closing day, and should, therefore, be taken into account as an adjusting event. It is, however, in practice inevitable that some information from the time after the decisive moment will be overlooked, which, had it come to the management’s knowledge, should have affected the report. Full, or even sufficient, information with regard to events after the reporting period may sometimes be hard to obtain. For example, it can be very difficult to determine, with certainty, the economic potential of a brand or a product under development, and this value can also vary quickly and with a wide variety of factors. Such an analysis may require – or merely be improved by – complex investigations of various facts and conditions, perhaps covering the situation in several important markets. Hence, we can conclude that, in practice, it will not always be possible for reports to be prepared in the light of exactly all such possible post balance date information, had it been known, would have affected the accounting.

The question is to what extent, or in which cases, it is acceptable not to gather relevant information on events after the reporting period. If there is a requirement to take into consideration only information that has actually been found, or happened to have been found, but no requirement to actually look for such information, a requirement to report events after the reporting period would be relatively toothless – and the accounting easy to manipulate. The wording of IAS 10 demands that the corporate management take into account known events that have occurred after the reporting period. For such a demand to fulfil its purpose, the regulation must be interpreted to also require the management to seriously gather information after the reporting period. Here, the situation for events after the reporting period is the same as in many other accounting issues: that there is a requirement of both knowledge of accounting rules (“the law”) and of the situation in the individual case (at least to the extent that they are relevant). From this background, how much information the firm is required to obtain, and what kind of information, are highly relevant questions.

The IAS 10 does not specify what (or how much) the management needs to know (or reciprocally, what the auditor must demand35). Neither does it give a clear picture of the importance of the fact that the audit is normally finalized before the period for events after the reporting period is over. However, it must be concluded that accounting must be based on relevant information. It is the responsibility of the management to ensure that the necessary information is gathered. Accounting based on facts and the actual gathering of information must be regarded as presupposing and requiring one another. At the same time, the degree of precision regarding the need to gather information is often very low in accounting rules – in the rules on events after the reporting period, as well as in other rules. Instead, in practice, the level of information gathering is determined on a very practical level of application of the law: by companies, auditors and perhaps courts and the tax authorities.

Needless to say, accounting standards are not usually based on strictly determined amounts of information that have to be obtained, but leaves a degree of responsibility to the management when preparing the accounting. It is, though, required that it is described in the report what assumptions, etc., the report is based on. If the accounting is not based upon facts that would have been possible and relevant to have gathered (but not unacceptable to not find – let us say market conditions in several countries), this should be mentioned in the report. However, this does not mean that the level of information gathering can be substantially reduced simply by stating that certain information has not been sought after! On the contrary, there is a requirement to provide serious evidence for the assessments that the accounting is based upon. Otherwise, the value of accounting would decrease radically and the rules on events after the reporting period would fail to fulfil their purpose. However, it can be argued that there should be some level of discretion regarding the level of information gathering – given that a decent level of transparency is catered through a description of the limitations regarding the facts on which the assessments are made.

Overall, the amount of information that has to be gathered seems to be a question of weighing the costs of finding information against the need for relevant financial information. In this balancing act, the materiality principle is of importance. This balancing act is difficult to make concrete in abstract legal terms, but must, to a significant degree, be handled in accounting practice. Generally speaking, in a specific circumstance, determining if a legally acceptable standard of care has been met should be of importance whether or not the accounting is conducted in conformity with practices accepted as normal by other members of the profession, in similar circumstances.36 There is, though, still need for interpreting the standard, its letter and its fundamental principles. The scope of the requirement should be dependent on several factors. Here, some such factors will be commented upon.

First of all, it must be said that other standards may give guidance regarding this question. This goes for rules on events after the reporting period in other standards (they do not say much either, but could have, within their specific field) but also for the basic principles on accounting: events after the reporting period are far from unique in the sense that they concern how much information a statement must be based. IAS 1.15 is relevant here; it stipulates that “financial statements shall present fairly the financial position, financial performance...”. This is arguably not the case if the firm has spent very limited resources on gathering information. There will also be room and need for a company policy.37 However, we are now looking at the IAS 10, discussing if it in itself gives sufficient guidance. As argued below, there are also specific aspects regarding the gathering of information when it comes to events after the reporting period. These will not be addressed very well in general rules and principles and would, therefore, benefit from more guidance in the IAS 10.

One highly important factor in the examination of how much information the management is required to gather is what requirements the applicable accounting rule (apart from the rule on events after the reporting period) sets, in each case. For example, if development expenditures are not capitalized, there is no need for a valuation of these after the reporting period – at least not to properly value such items in the balance sheet. However, if development expenditures are capitalized, there is indeed a need to audit their value after the reporting period. In some cases, the management can also influence the requirement regarding the level of information gathering by choosing accounting methods that reduce the need to look for events after the reporting period or by accelerating the work on the financial statements so that the period between the end of the reporting period and the signature of the accounting, that must be open for events after the reporting period, is minimized. The need to spend resources on investigating events after the reporting period is also reduced if the report is finished rapidly, closely after the end of the reporting period. To some extent, that is also a matter of choice.

The requirement regarding the level of gathering information on events after the reporting period does not seem to coincide with the requirement for the management to take into account what they actually know. Though not reflected in the IAS 10, there is probably a gap between these two requirements. There could probably be events after the reporting period, which the management do not have to be aware of in order to establish an accounting that complies with good accounting practice, but which, if the management are aware of them, must be considered as (adjusting-)events after the reporting period. In that case, it would not be “wrong” not to have found them, but “wrong” not to consider them, had they known about them. This could, for example, be the case with difficult-to-obtain foreign information, which, however, are of significance for the value at the balance sheet date of a company asset. It could, in such cases, not be demanded that every single possible piece of information on events after the reporting period must be found, but still that a serious (but proportional) investigation is carried out.

In one way, the closer it gets to the signing of the report, the more difficult it gets to meet the requirements of gathering new information about events after the reporting period and updating the preliminary reporting due to such events. At the end of the accounting work, there is, gradually, less and less time to investigate new events and gather information and to make the necessary adjustment in the report – and it must be possible to complete the report without having to constantly seek new information again and correct the accounting, again and again. This applies, of course, especially if the company’s accounts require large amounts of worldwide information and analysis.

The question is, in this context, whether the rules on events after the reporting period should be interpreted so that such difficulties are considered gradually, thus reducing the requirement to seek and take into account events after the balance sheet date the closer the last signing date comes? First of all, it would be very unpractical with such heavy demands so close to finishing the report. It should also be said that the further along after the balance sheet date, the less probable it is that new information should be interpreted as showing a circumstance existing already at the balance sheet day. With time, there ought, in many cases, to occur a substantial “saturation”, where most emerging circumstances are to be considered indicating something that is to be taken into account only in the subsequent year’s financial statement. However, this does not avert the requirement to, late in the accounting procedures, seek and take into consideration events after the closing day which in some cases can be (and maybe even should be) fairly burdensome,38 and the IAS 10 does not indicate any such nuances of the requirements regarding the level of information gathering. I do not argue for change in the IAS 10 here, or for the best way to interpret it regarding these demands. It should, however, be noted that this important question (that is specific for events after the reporting period) is not addressed.

5.7 Objective requisites and subjective requisites

5.7.2 Objective and Subjective Requisites in Combination

It will here be argued that when objective and subjective requisites are combined in events after the reporting period scenarios, peculiar effects could be perceived that would probably also be surprising for a reader trying to understand the IFRS. Below, this will be illustrated with a hypothetical example. How frequent, and how problematic, these problems are, is however, is not discussed. The only aim is to illustrate the nature of the problem.

According to IAS 38, Paragraph 57 (see details below), development costs are capitalized after technical and commercial feasibility of the asset for sale or use have been established, and from that day. This means that the entity must intend, and be able to, complete the intangible asset and either use it or sell it and be able to demonstrate how it will generate future economic benefits.

57. An intangible asset arising from development (or from the development phase of an internal project) shall be recognized/capitalized if, and only if, an entity can demonstrate all of the following:

1. The technical feasibility of completing the intangible asset so that it will be available for use or sale.

2. Its intention to complete the intangible asset and use or sell it.

3. Its ability to use or sell the intangible asset.

4. How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

5. The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

6. Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

This rule contains both objective requisites and a subjective requisite. The subjective requisite lies in the requirement (b) for the entity to “intend [...] to complete the intangible asset”. The other requisites are objective, and here I will focus on (d) that the firm must be able to demonstrate how the intangible asset will generate probable future economic benefits. There is nothing here, neither in the IAS 38 nor in the IAS 10, to suggest that the decisive moment (for any of the requisites) would be placed at any other moment than the balance sheet date.

Let us look at this hypothetical example, where Paragraph 57 of the IAS 38 is combined with IAS 10: Assume that an entity, First Inc., during Year 1 started and pursued two partly competing development projects, X and Y, which during most of Year 1 were estimated to be finalized during Year 2. Both these projects have the purpose of accomplishing rapid and high-quality photo scanning. The expenditure attributable to each of these intangibles during its development (Year 1) was 5 MEUR each. At the closing date of Year 1, the management team has decided to pursue the development of Project X, but discontinue Project Y. The reason for this decision was the management’s assessment that Project X would generate more revenue than Project Y. The assessment on the closing day was for Project X to generate up to 15 MEUR in revenue, and the decision is thus to complete the project. The 5 MEUR that have been spent on Project X is therefore (preliminary) capitalized, in accordance with the prerequisites stated above (that the management team deem are fulfilled, before events presented after the closing day – please accept that the example is not developed more in detail, regarding other aspects of IAS 3840).

Come early spring, it turns out that a competing foreign entity, Second Inc., has made a technical breakthrough just before the end of last year. This breakthrough is expected to, within short, result in a clearly better product than the product First Inc. has planned to (be able to) prepare on the basis of Project X. Project X is thus not expected to generate any significant future economic benefit, and it is therefore ended. In accordance with rules regarding events after the reporting period, this information must (and this should be a clear case) taken into account, and the 5 MEUR development cost for this project is thus not capitalized.

Facing this event after the reporting period, the management team of First Inc. chooses to discontinue Project X, on account of it not being profitable. The plan is instead now changed, to resume Project Y, on account of it showing more potential than before, due to other events after the closing date. Information obtained after the closing date shows that Project Y, after being finalized (which is presumed to occur during Year 2), will be able to yield approximately 9 MEUR. Project Y is now far more promising than expected, though. However, on the closing day, it was not the entity’s intention to finish this project. If we accept the above-presented (5.7.1) “intentions stay what they were, but insights are updated”-principle, the entity’s intention to finish this project is not changed by the subsequently changed plan of the management team (subjective requisite).

If these interpretations of IAS 10 and 38 are correct, events after the reporting period run the risk of making the accounting misleading, in the sense that different parts of the accounting rules function differently in relation to events after the reporting period. This seems to, at least occasionally, give rise to incoherent accounting, in the sense that it is based on factors (intentions versus more objective requisites) from various points in time.

I have no intention of estimating the importance of this problem, but if it was to be addressed in future IFRSs, there are a couple of things to say: First of all, for reasons given above, it would seem odd to change either part of the “intentions stay what they were, but insights are updated”-principle. Therefore, the best solution, if any, might be to change in other IFRSs so that they do not mix objective and subjective requisites, or to find other solutions for each such situation (perhaps within each of the IFRSs there this lack of incoherence would be seen as a problem).

It might be argued that in cases such as this, it would be more reasonable to consider events after the reporting period regarding both subjective and objective requisites. It is hard to see, though, that such an interpretation would be in line with the wording of the IAS 10, and the principles it is based upon. In certain cases, however, there might be room to argue that Project X and Project Y make two parts of the same development activity and that the intention simply was to complete at least one such project. That way, capitalization might still be allowed, in spite of the problems discussed above. Another option to reach a different outcome is to argue that the examined method of accounting fails to give a substance over form/true and fair view. It could thus well be argued that in this case another way of accounting would provide a more accurate picture of the situation in the company – although that is not what follows from the wording of the rules. However, here, that line of reasoning is not developed.41 A purely practical remark is that, in many cases, it would be very arduous for an auditor to refute a management team’s claims regarding their own intentions – should they simply base the company’s accounting in this question on a lie ...

The problem that has been illustrated here is presumably relatively unusual. It could, however, probably be relevant in other contexts than development expenses, namely, at least in some cases, where both subjective and objective requisites are relevant and the company has alternative strategies that change on behalf of events after the reporting period. This possibility would, however, have to be better examined, but on a general level, it appears to be relevant.